Exclusion clauses can be a challenge. What, exactly, and objectively, does a clause exclude? Could it even exclude all liability for a breach, reducing the contract to no more than a statement of intent? In Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies Plc the court summarised the key principles to be applied in interpreting an exclusion clause.

  • Construing an exclusion clause must be undertaken in accordance with the ordinary methods of contractual interpretation. Commercial parties are free to make their own bargains and to allocate risks as they think fit; exclusion and limitation clauses are an integral part of pricing and risk allocation. The principle of freedom of contract requires the court to respect and give effect to the parties’ agreement;
  • however, a vital part of the setting in which parties contract is a framework of rights and obligations established by the common law. In construing an exclusion clause, the court will start from the presumption that, in the absence of clear words, the parties did not intend to derogate from those normal rights and obligations;
  • the more valuable the right, the clearer the language of the exclusion clause will need to be if it is to be given effect;
  • however, “[i]n commercial contracts negotiated between business-men capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne…it is…wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only…”
  • notwithstanding the principles above, an exclusion clause will not normally be interpreted as extending to a situation which would defeat the main object of the contract or create a commercial absurdity, notwithstanding the literal meaning of the words used. This is a context in which it is open to the court to strain to avoid a particular construction, rather than one which requires ambiguity on a fair reading before the principle comes into play, because it is inherently unlikely that the parties intended that the clause should have so wide an ambit as in effect to deprive one party’s stipulations of all contractual force such that the contract becomes ‘a mere declaration of intent’;
  • however, even in this context, where language is fairly susceptible of one meaning only, that meaning must be attributed to it unless “the meaning is repugnant to the contract”. This is a principle which “should be seen as one of last resort and there is authority that it applies only in cases where the effect of the clause is to relieve one party from all liability for breach of any of the obligations which he has purported to undertake: Only in such a case could it be said that the contract amounted to nothing more than a mere declaration of intent”;

After considering the case law, the court rejected the suggestion that there is any principle that exclusion clauses cannot apply to the non- performance of contractual obligations or to repudiatory breaches of contract. Subject to the application of these principles, it will be a question of construction in every case whether the exclusion clause covers the breach.

Pinewood Technologies Asia Pacific Ltd v Pinewood Technologies Plc [2023] EWHC 2506